The sharp swings in global markets recently have rocked Indian markets leaving investors nervous. To put matters in context, stock markets should continue their role as allocator of capital for most productive uses. Retail investors whose money is being invested should get a fair chance to create wealth proportionate to their risk taking appetite. Regulators should ensure fair play, control systemic risks and penalise fraud. The process of long term wealth creation should not become hostage to the avarice of a few short term speculators. The stock market is a barometer of the future wealth creation capacity of the industrial enterprise system. In whatsoever manner the industrial enterprise system and the stock markets are evolving, these things remain the same.
Given that, why do individual stocks show volatile price movements? A stock price moves up or down depending on whether for that day or for that period supply exceeds demand or vice versa. It is this fragile balance in supply and demand which would determine the price movements for a stock and in aggregate terms the price movement for a group of stocks or for the stock market as a whole.
Individual stocks can be volatile if, there is extremely positive or negative information for that particular stock which is available to traders. Or, prices may swing if a group of traders collude, to create artificial scarcity or demand for a stock. Finally, price movements may happen, if at a macro level, there is national or international news which has some impact on some stocks or the entire market. Thus, This study will help the investors as well as market regulators to make the markets more efficient.
OBJECTIVES OF THE STUDY
The objective of the study is to analyze the various factors that affect the movement of stock prices in the Stock markets.
To study the various factors that affect and which drives returns such as macro and micro economic factors
Analyzing the various factors would help us in understanding the stock markets in a better manner and hence ensuring the safety of our investments as well as maximizing returns on such investments.
RESEARCH QUESTION/HYPOTHESIS
What are the factors that cause movements in stock price?
Why Stock Prices Can Skyrocket or Collapse, Irrespective of Market Fundamentals?
How effect recession in Indian Stock Market?
Has the Indian market developed into a speculative bubble due to the emergence of "New Economy" stocks?
LITERATURE REVIEW
The capital market this crucial to a modern, developing nation. Remember that stocks are issued initially to raise capital for a company providing goods, services, and employment. Even the secondary market for stocks can benefit the company, especially if it offers stock or stock options to its employees. Invariably, countries without a stock market are underdeveloped a id have low standards of living. If the stock market were abolished in major industrial nations, or discouraged through confiscatory taxation, it would likely provoke massive layoffs and a depression as the source of capital dried up. Many new company expansion plans would come to a quick halt. Granted, companies could raise investment funds from the bond market or through bank loans, but the cheapest and most liquid form of capital -issuing stock to the public - would no longer exist (Skousen, 2009).
The current volatility is the outcome of all these factors acting together, like Newton's Laws. Stock prices move as a function of all the above mentioned factors. What's new now is how the process of global knowledge dissemination has expanded and the reduced cost of stock market transactions for individuals (Barsky & Long, 1993). The recent volatility serves to prick this bubble of a fiction gaining currency recently in the Indian stock markets -- that equity stocks and mutual funds are a way to overnight riches. Let us be clear in our minds that equity stocks and equity mutual funds offer a way of long term financial life cycle planning. People who have invested in these over a long period have obtained excellent returns. People who invest in stock markets based on tabloid advice and with the greed of overnight returns are not investors but speculators (Chandra, 2008).
Volatility, it has been said, is a car with two pedals: the brake pedal is fear, and the accelerator is greed. Both are the principal drivers of the stock markets. The uncertainty of the past six weeks has enhanced market volatility. All you have to do is look at the swings, both intra-day and intra-week. On Tuesday, 10 November for example, the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) swung between 16371 and 16677 during the day. In the four preceding trading days, the market had risen by just over 7 per cent.
It is the first-of-a-kind for everyone. Intra-day volatility is becoming a way of life in the equity markets, and bond markets too. Quite often, the sentiment when the market opens is vastly different because brokerage firms have made some recommendations, which subsequently may have proved to be misleading, even wrong.
Agarwala (2009) points out that when the market re-bound began about four months ago, most fund managers - especially the domestic ones - kept waiting on the sidelines. When they rushed in, the market zoomed even higher with all the excess liquidity. Then came the Reserve Bank of India's monetary policy review that suggested the beginning of an exit policy. Fears of a liquidity squeeze then drove the market down.
Few fundamentals have improved sufficiently to stabilise the market. More importantly, the cycles are becoming shorter, which indicates a long-term trend of increasing volatility. Ten years ago, the bear cycles would typically last four or five years. Then it came down to two years or so. The current cycle was just for a few months. Where the volatility is scary is looking at the size of the ups and downs; keeping up a 250-point increase day after day for a week is making people begin to wonder. Is the rally for real, as so many are beginning to say, or is it a phase with a big correction three months or so down the line? Aid for investors, making investment decisions just gets harder with greater volatility - not just here, but the world over. From March to September this year, the stock-market indices have risen by anywhere between 25 per cent and 80 per cent across the globe. The 30-stock BSE Sensex has registered the highest rise a growth rate that was about 60 per cent higher than the next highest rise seen in Brazil's Bovespa index (Srinivas & Gajra, 2009).
Let us no forget that a year earlier, in 2008, the same Sensex fell 63 per cent from its all-time peak of 21206 in January to a three-year low of 7697 in October. But as the Sensex gained steam from March this year, a sort of amnesia see us to have set in. So when the Sen sex fell by nearly 11 per cent from mid-October to early November, there was some panic. Since then, of course, the Sen sex has recovered - with a couple of hiccups - to end the week at nearly 16849 on 13 November.
Many believe the aforementioned 11 per cent crash - ant similar falls in other stock markets around the world - had to happen sooner or later, although they find it difficult to explain the quick sharp recovery thereafter. "After the steep rise in the past six months, the markets had to take a breather," says Raj Bhatt, chair-man and chief executive officer (CEO) of Lon-don-based Elara Capital, a member of the London Stock Exchange. Another reason for the recent jump in volatility comes from central banks' assertions about the need for an exit strategy from all that cash overvalued, and anticipate a correction - though no one is clear how big it will be - in the next three months or so.
If liquidity is the element that will keep volatility under control, then there may not be much to worry about. In the last quarter of the financial year, life Insurance companies and mutual funds raise a lot of money. Estimates put the total potential amounts over the equivalent of $11 billion. This is separate from a couple of billion dollars capital inflows which came through foreign institutional investors (FIIs). There is a consensus that global economic recovery is largely dependant on growth in consumption in the US as well as the ability of China to sustain its economic growth. There is, however, mixed opinion about how it will pan out in the next six months. The most important economic driver globally is fall in unemployment. If employment picks up in the US and Europe, it will spur demand in consumption and lead to a sustainable rally in the financial markets." British economists are not so confident of that happening in the UK. Royal Bank of Scot-land's London-based chief economist, Andrew McLaughlin, stated in a recent weekly brief that the UK economy confounded expectations by contracting for a sixth consecutive quarter, "making the current recession the longest in the country's post-war history. The cumulative contradiction in output now stands at 6 per cent, on a par with the decline seen in the early 1980s".
Recent Chinese economic data points to a strong growth in heavy industrial production, largely on account of infrastructure spending, but Asia-tracking economists are not fully convinced the overall economy in China is growing in a balanced manner. China's stock market index, Shanghai Composite, has been the most wildly gyrating of all global indices.
With the integration of our stock markets with international markets, the rules of the game have changed. No one influence can guide the short term movements in the stock markets. As investors, we have to learn to live with volatility. One of the major factors causing today's volatility is the unanimity in investors' inclination towards new economy stocks and their shunning of old economy stocks. This has led to a huge polarisation in the markets. Today's markets are characterized by large investment flows into companies with emerging businesses -- which typically have low floating stock -- leading to wild price swings (Roh, 2007). Volatility has gone up as actively managed funds churn their portfolios more often. This gets exacerbated by momentum investing by day traders and fund managers. Soon, stocks are not bought on the basis of their fundamental value but on the greater fool theory. Unrealistic investor expectations driven by the recent history of the boom in IT stocks is a cause for concern: now, the quality of the stock and fundamentals are ignored in a market characterised by daily assessment of profits and losses. Recent price history clouds the investors' minds so much that they start treating that price as the real value of the stock and don't take a longer perspective of the company (Rapport and Michael, 2001).
The new economy stocks are a different breed. There is a lot of theme or concept investing taking place in these stocks now. It is difficult to quantify the future of the businesses and put a value to those. To discount all the future cash flows and put a value to the company is passe and PEG ratios based on the next couple of year's earnings is in. The near term high growth rate in these businesses is overshadowing the pricing of risk and technological obsolescence for a particular company. Market volatility is a sign that investors are unsure of how to value these stocks (Ackley, 2006). In the minds of investors, there is a battle going on between this great new paradigm and the valuations of the stocks. In such a scenario, mood swings between hope and fear cause volatility.
The volatility in new economy stocks reflects systemic changes taking place in the underlying businesses. In the boardrooms of companies, long gone are the months of planning and debate on capital allocation, mergers/acquisitions and joint ventures. In the Internet age, a three month delay can be the difference between success and failure. Also, we are now in an age when companies can think of becoming multinationals in a short span (e.g. Yahoo, Amazon), when established age old companies see their fortunes dip very fast (e.g. Britannica) and when companies can go boom and then come tumbling down in a couple of years (e.g. Netscape). When businesses are witnessing such rapid stratospheric booms and busts, it is natural to expect their stocks to be volatile (Hirschey and Nofsinger, 2008).
In times of extreme volatility, investments in diversified equity funds offer a hedge against stock specific risk. The regulator should leave the pricing of the stocks to markets and its play on fear and greed, but should come down heavily on rigging induced volatility. It should clamp down on insider trading and selective information leaks. Information dissemination when done timely and uniformly to all investors would bring in transparency and should help arrest volatility to some extent. The margin requirement in the new economy stocks should be fixed at a high level as investors will have to learn to live with high volatility in these stocks (Barsky & Long, 1993).
In a theoretical sense, any time someone buys the shares of a company in the market, they are effectively stating that they believe the shares of the company are undervalued. The fact that they are buying implies a belief and expectation that the shares will increase in value in the future. At the same time, the person who is selling the shares is expressing the opposite belief. By selling, they imply that the stock is overvalued and the expectation that the stock will go lower in the future. In this way, the stock market is forum for debate on what the value of the company and its shares is.
RESEARCH METHODOLOGY
Research Design
Descriptive research includes survey and fact finding inquiries of different kind. It is the description of the state of affair, as it exists at the present. The main characteristics of this method are that the researcher has no control over the variables; he can only report what has happened or what is happening. The method of research used in this research will be survey method. The research assignment under focus is aimed at gathering some vital information of the factors affecting movement of stock prices, which could be through a structured questionnaire which covers aspects like individual role in customer investment decisions etc.
MARKET RESEARCH PROCESS
STEPS OF RESEARCH METHODOLOGY
The study will be carried on in a proper planned and systematic manner. This methodology includes
Familiarization with the Stock Exchanges
Observation and collection of data.
Analysis of data.
Conclusion and suggestion based on analysis.
Data Collection
The secondary sources will be used for collection of data. In secondary source of data collection relevant records, books, diary and magazines will be used.
The last stage, i.e. the output stage included analyzing of the processed information in to final findings and comparing the information with the data of mutual fund companies and then arriving of final conclusions and policy recommendations
